Federal judge rules HHS' efforts to punish pharma over 340B restrictions 'arbitrary and capricious'

Gavel court room lawsuit judge
A court condemned pharmas' "unilateral extra-statutory restrictions" on sales of 340B drugs to covered contract pharmacies but turned aside the Department of Health and Human Services' efforts from the past year to penalize drugmakers for those same practices. (Pixabay)

The pharmaceutical industry scored a muted win in its long-running feud with the Department of Health and Human Services (HHS) over 340B program discounts Friday when a federal court judge granted Eli Lilly’s bid to vacate two administrative actions aimed at drugmakers.

U.S. District Court Judge Sarah Evans Barker ruled that a December advisory opinion from HHS’ Office of the General Counsel and a May enforcement letter from the Health Resources and Services Administration (HRSA) were “arbitrary and capricious” and in violation of the Administrative Procedures Act.

But while Barker ordered the two actions to be set aside and vacated, she also specified that HHS did not exceed its statutory authority or act unconstitutionally in regard to the May enforcement letter.

"Lilly is encouraged by Friday’s opinion, which confirms that the government’s enforcement decision against it was improper," the drugmaker said in an email statement.

Further, the judge determined that Lilly and other drug manufacturers are not permitted under the current 340B statute “to impose unilateral extra-statutory restrictions on its offer to sell 340B drugs to covered entities utilizing multiple contract pharmacy arrangements.”

RELATED: HHS pulls 340B advisory opinion after it fails to throw out AstraZeneca lawsuit

HHS may have “suddenly” changed its views on whether the agency could enforce penalties against drugmakers restricting sales of the discounted products to contract pharmacies, but the law as written makes it impossible to discern whether Congress intended for drug manufacturers to have “unlimited delivery obligations … untethered to the particular covered entity’s actual distribution needs,” the judge wrote.

As such, Barker underscored the need for lawmakers to settle the ambiguity with new, explicit legislation.

“We have no insight into why there is apparently so much reluctance to promulgate a holistic legislative proposal to bring clarity to the scope of the regulated parties' obligations and entitlements … rather than engage in piecemeal interpretations and after the fact patchwork characterizing the history of the agency's attempts to manage this program,” Barker wrote in the Friday order.

“What we have come to see, however, is that the 340B program can no longer be held together and implemented fairly for all concerned with non-binding interpretive guidelines and mixed, sometimes inconsistent messaging by the agency regarding the source and extent of its authority to enforce statutory compliance in the area of contract pharmacies.”

Eli Lilly’s case against HHS is the latest in a lengthy dispute between the agency and a slew of pharmaceutical companies including AstraZeneca, Novartis, Novo Nordisk, Sanofi and United Therapeutics.

The 340B program requires drugmakers to offer discounted products to safety net hospitals, community health centers and other providers as a condition of participation in Medicare and Medicaid.

Beginning in July 2020, however, the drugmakers announced they would no longer provide 340B-discounted products to contract pharmacies or would be limiting sales unless a 340B-covered entity provided claims data ensuring there were no duplicative discounts being applied.

RELATED: PhRMA sues Arkansas over law requiring companies to offer products to 340B contract pharmacies

In response, HHS’ Office of the General Counsel issued the December advisory opinion, which stated that the restrictions violated federal law, and later through HRSA delivered enforcement letters threatening penalties to the six companies.

HHS’ pushback has generally taken a beating in the courts. In June, the agency decided to pull the December advisory opinion to “avoid confusion and unnecessary litigation” after courts took the side of AstraZeneca and struck down a motion from HHS to dismiss the case.

The drugmakers have dug in their heels throughout the process, refusing to reverse their policies even as HRSA issued new (now remanded) warnings in late September.

Industry supporters of HHS’ position focused on the silver lining of Friday’s decision.

In a statement, Maureen Testoni, president and CEO of 340B Health, a membership organization of more than 1,400 340B participants, said the group was encouraged by Barker’s position on the “unilateral” restrictions on drug discounts for contract pharmacies.

“We are encouraged that the court upheld HRSA’s view that Lilly is violating the law as one that ‘best aligns with congressional intent’ of the 340B program,” she said in a statement. “We urge the government to continue its work to enforce the law and restore the statutory drug discounts that enable 340B hospitals to care for patients with low incomes and those living in rural parts of the country.”